But the toll exacted on the economically vulnerable by these modern-day loan sharks is as harsh as it ever was.
Under the Alabama Deferred Presentment Services Act, which regulates payday lenders, for every $100 borrowed, debtors can expect to pay approximately $17.50 in interest and fees. Borrow $500 today and you'll owe $587.50 two weeks later. Roll that payday loan over 52 weeks and the interest works out to 456 percent.
One person at the mercy of those mean rates is Calhoun County's Wanda Champion, who was profiled in Wednesday's installment of The Star's predatory lending series. After a series of medical problems and other twists of misfortune, Champion had nowhere to turn except predatory lenders. Now she's harassed by collection agencies looking to recoup the thousands of dollars she owes.
The Star's investigation found another problematic state law that doesn't receive as much attention as the one governing payday loans. The Small Loan Act can also trap the poor into crushing debt, as it did in the case of Gregory Rogers, an illiterate Anniston man. The Small Loan law caps interest rates at 36 percent, a figure which only looks good when compared to the astronomical 456 percent allowed by the payday loan law.
Not surprisingly, payday lenders go where the promise of return is highest. In a paper published this spring by Catholic University's Law Review, Christopher Peterson and Steven Graves constructed a map showing the density of payday lenders per 10,000 people. (A digital copy of the map is online at www.csun.edu/~sg4002/research/usury.html)
In Alabama, the density of payday lenders is 2.712 per 10,000. That's the second highest in the nation, just behind Mississippi, with a density of 3.834. Not surprisingly, the Magnolia State's regulation of predatory lending is as lax as Alabama's.
Said differently, according to progressive advocacy group Alabama Arise, our state has more payday lenders than it does McDonald's restaurants.
Nowhere to turn
Throughout the state's history of lax government oversight, followed by more stringent lending rules, followed by the current era of regulatory back-sliding, one constant has remained: A steady supply of cash-strapped Alabamians willing to accept the high interest rates associated with predatory lenders. Reformers and industry defenders alike agree that even if the state does away with predatory lenders, their prey will remain. Any solution to this problem must acknowledge this fact.
Short-term lenders provide a service for folks who have nowhere else to turn. The deal is quick cash in exchange for higher-than-usual interest rates and rapid repayment. Pay back the loan on time, the industry's defenders say, and there's no problem.
Often short-term borrowers are stuck. They can't obtain credit from a bank or by any other legitimate means. So they take a risk in return for quick cash.
So says Donnie Breed, owner of Donnie's Quick Cash in the Hollis Crossroads section of Cleburne County.
Listen to Breed talk about his customers and he starts to sound like a credit counselor rather than a short-term lender.
"You can't be ignorant," he says. "If you borrow money, you've got to have a plan to pay it back."
Breed makes his living making small loans, $300 on average. He doesn't earn a lot, he says, but it helps put his daughter through college. If applicants can prove they've had a checking account for more than a few months, they can borrow. On a $300 loan, Breed collects $52.50 in interest.
In exchange for that steep interest rate, Breed says, borrowers can get cash faster than a bank could process a loan application. That's if the bank would even bother to lend such a small sum, or if the customer's credit rating isn't in the ditch. He notes that bank fees for overdrafts and other financial slipups are not so easy on low-income folks either.
Breed uses a privately operated lending database to make sure a potential borrower isn't overextended with other payday lenders. But as The Star's series on predatory lending has shown, the state's $500 limit on these types of loans can and has been thwarted. Like others who spoke with The Star, Breed says the state needs a better, more comprehensive database.
He tells the story of one customer in need of several thousand dollars. After several missteps, Breed helped the man secure a loan at better terms from an-other lending institution.
"I have to get involved with these people," he says.
Breed understands first-hand the cruelties of the marketplace. He once earned a living at a Heflin manufacturing plant until it closed its doors and sent his job overseas.
"I was not going to move to Pakistan," Breed says, so with his severance pay and a bank loan he opened Donnie's Quick Cash in 2004.
His affection for his customers is real. Sounding like the eternal optimist, Breed says of those be-hind on their payments, "Most of these people will come around."
What brings customers to Donnie's Quick Cash? Plenty of reasons: money for a vacation, to pay the power bill, to visit the doctor or to bail a relative out of jail.
Breed agrees that the family borrowing spending money for the beach is different from the family needing $100 to take a sick child to the doctor.
Trouble is, for either genuine need or frivolous whim, Breed's customers and thousands like them in Alabama have nowhere else to turn. Payday loans are a last resort.
Some industry defenders and watchdogs alike warn: Put predatory lenders out of business, as other states have done, and be prepared for a spike in personal bankruptcies and other societal ills.
States must find avenues to extend small lines of credit to low-income Alabamians. The state then must require oversee these institutions with strict regulations, stronger interest-rate caps and a statewide database that can prevent consumers from taking out monster loans while already underneath monster debts.
The problems are numerous. The solutions are scarce.
Here are a few:
1. Short-term lenders need a central, state-controlled database to ensure that potential customers are not stretched too thin. As this editorial board discovered in countless cases, the $500 limit on payday loans is easily overcome.
2. Follow Anniston's lead in discouraging more predatory lenders from setting up shop. Quick-buck lenders already litter Quintard Avenue, Anniston's main commercial artery. Eighteen months ago, the city began denying new business licenses to such lenders. It recently renewed its moratorium.
Other Alabama cities wrestle with a glut of these lenders. As one economics professor told The Star, predatory lenders can crush a community's entreprenual spirit.
3. Microcredit. The best interests of the public and private sectors are served if needy citizens have an alternative to predatory lenders. Bangladeshi economist Muhammad Yunus has shown the way. The Nobel Peace laureate developed a banking system for developing areas that, in his words, "is offered for creating self-employment for income-generating activities and housing for the poor, as opposed to consumption."
Alabama could take a lesson. Its most financially desperate citizens — those in need of quick cash to visit the doctor, to repair the tire on the car or to get a small-business plan off the ground — need somewhere else to turn.
All of Alabama should be ashamed that so many members of the working poor are forced to use predatory lenders who shackle them in a cycle of debt with interest rates that are by their proper name "usury."
They need an alternative.
A public-private partnership could lend small amounts of cash at miniscule interest rates or even interest-free, a la Yunus' Grameen Bank, which has lent to 7.5 million Bangladeshis over 25 years. Among Grameen's requirements are that (a.) the need be genuine, (b.) the money be spent on socio-economic development as opposed to conspicuous consumption and (c.) the borrower be willing to lend a hand to those in need.
Something similar here involving, local and state government, social service and faith-based agencies as well as businesses offers a tremendous payoff, promising a life raft to those in legitimate need. Entrepreneurship would flourish as those with big ideas could have the $300 needed to start a small home business. A broken car or a sick child could be taken care of without massive debt.
In recognizing Yunus and Grameen Bank, the Nobel Committee Chairman noted, "Sustainable peace cannot be given unless large numbers of people have the opportunity to get out of poverty. Development such as this is useful in human rights and democracy."
If Calhoun County and the state of Alabama are rife with businesses that groups such as Alabama Arise, the Center for Ethics and Social Responsibility at the University of Alabama and the Center for Responsible Lending all consider rapacious to communities, then it is our leaders' duty to seek ways to protect residents.